Collateral Release Letter

Summary

This is a template collateral release letter in which a collateral agent agrees to release its security interests in the assets that have been provided as collateral for a secured loan transaction. This template includes practical guidance, drafting notes, and optional clauses. Unlike a payoff letter that terminates all security interests in connection with the repayment and satisfaction of obligations under a credit facility, this collateral release letter removes collateral support, but leaves a credit facility intact as an unsecured facility. For an example of a Payoff Letter reflecting a full repayment of loans and termination of all collateral, see Payoff Letter (Financing Transaction). Transitioning a secured transaction into an unsecured transaction during the term of a credit facility is unusual and is generally enacted through a full refinancing or replacement of the facility rather than a simple collateral release letter. A full replacement of the underlying credit agreement may be preferable to give the parties an opportunity to revise the terms to more closely reflect the standards of an unsecured transaction. However, in some transactions it is appropriate to release the liens securing a credit facility with a collateral release letter, such as where the parties contemplated that the security interests would eventually fall away at the time the credit agreement was originally negotiated (for example, where the parties agree that the security interests will fall away if the borrower achieves an investment grade credit rating). A collateral release letter may also be used where the collateral is not material to the lenders’ credit decision to lend. Note that it is common for borrowers to request partial lien release letters to remove specific items of collateral over time while leaving the overall collateral package in effect (such as when disposing of assets). For an example of release letter to use in such circumstances, see Partial Lien Release Letter. Note that while this template terminates the underlying security interests supporting the credit facility, further steps will need to be taken to clean up the record. This can include returning any possessory collateral held by the collateral agent and terminating any UCC financing statements, filings with intellectual property filing offices and account control agreements. Read this collateral release letter in conjunction with the practice note Collateral Perfection and Release in the Closing Process.